In a joint submission to the Productivity Commission (PC), AMP, the Bank of Queensland, Suncorp, Bendigo Bank, MyState and ME Bank warned the PC of the “unintended consequences” that a loan comparison tool may have on the market.
In its draft report, the PC called for the Australian Prudential Regulation Authority (APRA) to collect interest rate and fee data and use it to determine a median rate that would be published via an online tool. The PC claimed that such a reform could help increase transparency for customers and enhance competition.
While acknowledging that such a move could improve competition, the regional banks argued that the publication of a median interest rate could “mislead customers” and encourage lenders to develop loan products with “shortcomings”.
“While this has the potential to improve competitive pressure from the demand side of the market, it may also involve considerable practical difficulties,” the banks noted.
“More importantly, it may mislead customers as to the true cost of a product. The main problem with such tools is that they have a tendency to lead to ‘gaming’, whereby suppliers develop products that rate well on the tool but have shortcomings in other areas.
“For example, comparison tools have difficulty capturing the full benefits of a ‘bundle’ of services offered by a financial institution.”
Further, the banks claimed that the tool could create an incentive for some lenders to “shift costs” to products and services outside the tool’s scope.
“They also provide an incentive for suppliers to increase costs for services outside the scope of required disclosures. For example, in the case of mortgages, suppliers could shift costs to account closing or switching fees.”
The regional banks added that the tool could instigate a “race to the bottom”, with lenders creating products that “fall short of expectations”, potentially requiring regulatory intervention.
“[Some] financial institutions may respond by choosing not to offer services outside what the tool requires, and consumers could end up with products that fall short of expectations.
“Such an approach could see suppliers in a race to the bottom, offering only the most basic and feature-free products in order to present the most attractive median interest rates to the comparison tool.
“This would then inevitably result in additional regulatory interventions as governments attempt to patch over the shortcomings of the tool.”
In their submission, the lenders also put forward several recommendations concerning competition in the market.
The regional banks called for measures that would create a “level playing field” and help dissolve the “oligopolistic market structure”.
Their recommendations included:
- Addressing the “too big to fail” implicit subsidy which affords the major banks a “three-notch” credit rating advantage on wholesale debt
- Reducing the regulatory burden that falls more heavily on institutions with smaller customer bases
- Reducing the risk weight differences between IRB and standardised ADIs, without eliminating the incentive for smaller ADIs to seek advanced accreditation
- Requiring proper disclosure of mortgage broker ownership, including publication of the proportion of business that goes to the broker’s owners
- Removing the macro-prudential restrictions that have the effect of locking in the market share “status quo”